Wednesday, March 28, 2012

FICO Score versus Vantage Score


Your credit score it is one of the most critical factors in your financial life. It determines if you will be approved for a loan or line of credit. A credit score is a number developed and calculated by the Fair Isaac Corporation (FICO) that lenders use to rate potential customers in determining the likelihood that a customer will pay their bills on time. Your credit score is used for employment, approval for loans and credit, insurance rates, opening bank accounts and affects critical aspects of your life.

The FICO credit score is determined by using 5 main criteria as defined by MyFico.com: your payment history which accounts for 35% of your credit score, the total amounts owed which accounts for 30% of your credit score, the length of your credit history which accounts for 15% of your credit score, new credit which accounts for 10% of your credit score, and the types of credit used which accounts for 10% of your credit score.

Payment history shows the history of how you paid your bills either on time or late. Amounts owed show the total amount of debt you owe. If your balance is near the credit limit this may lower your credit score. The length of history indicates how long you have had credit. If your credit history is 2 years or less this could lower your credit score. New credit indicates how many times you have applied for new credit.

If you open too many new accounts in a short period of time this may lower your credit score. The types of credit used indicate the types of accounts you have such as revolving or installment accounts. Revolving accounts are usually credit cards and installment accounts are usually mortgage loans, auto loans, personal loans, etc.

The higher the credit score the lower the interest rate you will receive for a loan or line of credit. Having a good credit score can save you thousands of dollars in interest over the life of the loan.

Another credit score that is used is called the Vantage Score which ranges from 501 to 990 and correspond to letter grades with “A” credit ranging from 901–990 and “F” credit ranging from 501–600. The Vantage score is currently available to customers for a nominal fee and can be ordered by calling the three major credit reporting agencies, Experian, TransUnion and Equifax. The scale for the Vantage credit score is: 901-990 A score, 801-900 B score, 701-800 C score, 601-699 D score and 501-599 F score.

Benefits of FICO Scores
1. Starts credit history as soon as a person starts using credit
2. Over half your score consists of payment history and total amount owed
3. Used for approval of loans and credit cards
4. Helps those with established credit history
5. Helps those with at least 2 years of credit history
6. Helps those aged 30-65

Disadvantages of FICO Scores
1. Doesn’t offer credit grades to coincide with credit scores
2. Scores range from 300-850 – a span of 550 points
3. Credit scores may not be the same with each credit bureau
4. Doesn’t consider rental payment history

Benefits of using the Vantage Score
1. Provides consumers with little to no credit or bad credit with more accurate scores
2. Starts credit history as soon as a person starts using credit
3. Uses rental information
4. Helps young adults aged 18-25 and college students
5. Helps those who are recently divorced or widowed
6. Helps those with bad credit or who previously filed bankruptcy

Disadvantages of the Vantage Score
1. You score could decrease, if your FICO score was 720 your score may remain in the 700s using a Vantage score which would give a C grade.
2. Scores range from 501-990 – a span of 489 points.
3. Over half your score consists of payment history and recent credit so you are penalized heavily for having any new credit. The length of credit history weighs less. Available credit only consists of 1% of the credit grade so you can have a credit card maxed out or with high balances and still have a good credit grade.
4. Credit scores may not be the same with each credit bureau.

However, it is up to the lender or company to decide which score they want to use to consider approving you for a loan or credit card.

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